Stocks Fall, Treasuries Advance in Listless Trade as Fed Looms

Will the Federal Reserve Move for the Sake of Moving?
  • U.S. shares halt two-day climb amid below average volumes
  • Fed futures signal 26% chance of rate increase on Thursday

U.S. stocks slipped in light trading, while Treasuries edged higher three days before the Federal Reserve’s policy decision. Emerging-market assets gained as traders held onto bets the central bank will stand pat amid financial-market volatility.

The Standard & Poor’s 500 Index retreated amid trading volumes that were 21 percent below the 30-day average. Equities in developing nations rose for the first time in three days. Ten-year Treasuries advanced a second day, while the dollar declined versus major peers, including the yen. Copper extended losses with crude oil on concern slowing growth in China will hurt demand. 

Traders put odds of the Fed raising borrowing costs at its Sept. 16-17 meeting at 26 percent, down from more than 50 percent before China’s surprise currency devaluation roiled markets and boosted concern over the outlook for global growth. Yields on Treasuries due in a decade held in a five-basis-points range, while the S&P 500 pivoted near 1,950 and emerging-market assets recouped some of the deep losses they’ve endured over the past month.

“That’s kind-of indicative of a bearish bias and sideline-sitting by a lot of investors,” said Walter “Bucky” Hellwig, who helps manage $17 billion as a senior vice president at BB&T Wealth Management in Birmingham, Alabama. “There’s just not an impetus to make a big bet here in front of the Fed meeting.”

Stocks

The S&P 500 fell 0.4 percent to 1,953.03 by 4 p.m. in New York, after jumping 2.1 percent last week, the most since July. Trading in American equities was light amid a two-day Jewish holiday.

“The market is in a wait-and-see mode,” said Randy Frederick, managing
director of trading and derivatives at Charles Schwab Corp. “Unless we get a
major, major move in oil or the dollar or China pulls a crazy stunt, I think
we’ll be like this until Thursday.”

The Stoxx Europe 600 Index ended Monday down 0.6 percent after fluctuating in a wide range. While the gauge fell 14 percent from its record in April through last week’s close, strategists remain confident it will rebound and post its best year since 2009.

Analysts forecast the European benchmark will climb about 18 percent in 2015, outperforming U.S. equities and recovering all ground lost after China devalued the yuan in August. The S&P 500 will rise 12 percent from the last close through December, according to projections.

The MSCI Asia Pacific Index was little changed Monday as Australian and Hong Kong stocks climbed while those in Japan and South Korea slipped.

(For more news on stocks, see TOP STK.)

Bonds

Yields on 10-year Treasuries fell one basis point, or 0.01 percentage point, to 2.18 percent. The bond market is suggesting U.S. policy makers will wait to raise rates, while economists are almost equally divided. The yield has moved between 2.17 percent and 2.22 percent for the past five sessions.

With odds on a rate rise so low, if the Fed were to move it would have a “major impact” on markets, according to Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands.

In Europe, more economists are now forecasting the European Central Bank will expand its stimulus program to support a faltering economy, though bond investors have yet to be convinced with government bonds in the area little changed today. The Bank of Japan meets Tuesday and is also on course to boost monetary stimulus, according to Goldman Sachs Group Inc.

(For more news on bonds, see TOP BON.)

Currencies

The dollar declined a second day versus the yen amid doubt the Fed will move this week, with a Bloomberg gauge of the greenback versus 10 major counterparts slipping 0.1 percent to a two-week low.

The yen increased 0.3 percent to 120.23 per dollar. With the Japanese economy struggling to gather momentum, 11 of 35 economists surveyed by Bloomberg see the BOJ stepping up easing measures in October, while two are forecasting a move as soon as Tuesday.

Yuan positions at China’s central bank and financial institutions fell by the most on record in August, a sign that policy makers stepped up intervention to support the currency.

Turkey’s lira declined to a record following its longest stretch of weekly declines since 1999. Australia’s dollar climbed 0.7 percent in a sixth day of gains after Prime Minister Tony Abbott was ousted by a former cabinet minister amid anxiety over the impact of China’s slowdown on the resource-driven economy.

(For more news on currencies, see TOP FX.)

Emerging Markets

The MSCI Emerging Markets Index advanced 0.6 percent amid bets the Fed will hold fast, shoring up demand for riskier assets whose valuations tumbled in the past month amid mounting signs China’s economy is faltering. Equity benchmarks in Russia, India and Malaysia climbed at least 0.8 percent.

“The market is not positioned for the Fed to raise rates,” said Aurelija Augulyte, a senior strategist at Nordea Bank AB in Copenhagen, who favors commodity currencies like the Brazilian real and South African rand after they “overshot” their fair values. “The Fed is not in a rush and even if they do hike, which they might, they will talk down the rate path, and maintain the gradualist tone, which should be emerging-market positive.”

Chinese authorities are faced with a juggling act that’s getting more complex by the month, as they seek to cushion the economic slowdown, support the stock market, stabilize the yuan and press on with reforms to give market forces a bigger role in allocating resources.

(For more news on emerging markets, see TOP EM.)

Commodities

Copper and other industrial metals dropped after weak Chinese industrial output and fixed-asset investment bolstered concern that demand growth will stall in the world’s biggest metals consumer.

Gold prices are trading near a one-month low, investors are dumping holdings through exchange-traded products, and the metal’s volatility is rebounding.

West Texas Intermediate crude fell 1.4 percent to $44 a barrel. It sank 2.8 percent on Friday, capping a weekly loss of 3.1 percent amid concern over a glut. Brent crude dropped 3.3 percent to $46.54.

(For more news on commodities, see TOP CMD.)

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